It’s worse than you think, says chartist

Plumbing the depths: Commodities traders in a frenzy while the p/e ratio plunges

Is it time to buy the market?

As some of the biggest City brains and top equity stockpickers daily wonder whether they should have come out so early in calling a turn in the market, one of the City's leading "chartists" today revealed the 20% fall in the FTSE 100 this week has put it back to a level not seen since the great crash of 1987.

Mike Lenhoff, chief strategist at Brewin Dolphin and a legend among the City anoraks who spend their time looking at charts and graphs, today produced the evidence that if confidence in London's leading stocks gets any worse, we are in 1929 territory.

"Not since the crash of 1987 has the prospective p/e [price-to-earnings] ratio for the FTSE 100 been as low as it is today," said Lenhoff.

He showed that top shares are on average priced at 8.5 times their annual earnings, a historic low, and compared with the 22 times annual earnings that they were trading on at the height of the dot-com bubble.

However, while the likes of Anthony Bolton, the eminence grise of City stockpickers at Fidelity, were breaking ranks to say it could be time to buy when the FTSE was 25% higher last week, Lenhoff is cautioning the market may not be factoring in the effects of a recession.

"The current p/e ratio of just 8.5% is on based earnings growth of over 8% for next year," he said. "Equities look inexpensive but because of recession and the likely downgrading of earnings estimates they aren't quite as inexpensive as they look. But that doesn't mean they do not offer good long-term value."

Outside of the banks, one of the biggest losing sectors recently is the metals and mining stocks and analysts at Citigroup believe shares in the likes of Xstrata, Anglo American and Vedanta Resources are now vastly undervalued.

While commodity prices have slumped 30% in recent months, shares in miners have on average more than halved.

They say that with the miners generally trading at between just 4.5 times and 5.5 times 2009 forecast earnings and even factoring in another 20% to 30% fall in commodity prices, there is up to 50% upside on the shares at current prices.